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In the corporate world management of cost is a huge aspect of the business. Cost management is one of the most critical elements that are required to run a business. A business usually deals with variable costs and fixed costs. Fixed costs are those costs that remain uniform irrespective of sales and production. However, variable cost is the costs that change depending upon the production and revenues of the business.
What is the Variable Cost?
Variable cost is the cost of those elements which change according to the changes in production and sales of a company. The variable cost is directly proportional to the level of production.
Variable Cost Example
Some variable cost examples are direct wages, packaging, inputs in production, cost of goods sold (COGS), commission, and other utilities.
Calculation of Variable Cost
For calculating variable cost a simple formula is to be followed. The output quantity must be multiplied by the variable cost per unit of output. Below is the formula involving the calculation of variable cost.
Total Variable Cost = Total Quantity of Output X Variable Cost per Unit of Output.
Why are Variable Costs Important?
The variable costs do not increase or decrease according to the activities of any company but rather according to the inputs and outputs of the production. Additionally, consideration of variable cost is important while determining prices. Therefore, the knowledge and efficient management of variable costs are very crucial as it helps the management team to act according to the changes that occur in the marketplace and the growing patterns of the company.
How is knowledge about the variable cost price advantageous for a company?
Proper information regarding both fixed and variable costs provides invaluable assistance in the identification of a proper profit-earning price level for the products or services produced by a company. This information can further be used to ascertain the break-even point. The break-even point is referred to as the point where the number of units signifies the level where total revenues are equal to the total cost. The same information can also be used to acknowledge economies of scale, which is derived from the information which tells that with the increment of output, fixed costs are spread over a humongous number of output items.
Conclusion
Variable cost and fixed cost are important aspects of a business and therefore proper management of both the costs is equally important for a company. Variable costs can be managed easily and efficiently with the introduction of a budget. Maintaining a budget for variable costs will also prevent a company from taking loans to increase production or output. This further signifies the importance of variable cost in both profit-making and non-profit making organizations.
